Autumn Statement: taxes reformed for self-employed workers

Self-employed workers will see their tax bills drop by hundreds of pounds from next year following changes announced in the Autumn Statement.

Jeremy Hunt, the Chancellor of the Exchequer, revealed he would be adapting the National Insurance contributions paid by self-employed workers, which will take effect from the new tax year in April 2024.

Here’s how the National Insurance contributions are changing, and what that will mean for self-employed workers.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Changes to National Insurance contributions

Self-employed workers pay different forms of National Insurance contributions, once they make profits of above £12,570 a year.

Class 2 National Insurance contributions are paid at a flat rate of £3.45 per week. 

However, Hunt revealed that from April 2024 Class 2 National Insurance contributions will be scrapped, a move which will save self-employed workers £192 a year.

Self-employed people also pay Class 4 National Insurance contributions, which is calculated as a percentage on their profits above £12,570.

Currently this is paid at 9% on profits from £12,570 to £50,270, and 2% on profits above that level.

This is changing from next year however, dropping to 8% on profits between £12,570 and £50,270.

Taken together, the Treasury believes the measures will be worth a tax cut of around £350 a year to the average self-employed person earning £28,200. 

In total around two million workers will benefit from the changes.

What about voluntary National Insurance contributions?

National Insurance contributions are important beyond simply raising money for the government, since they also impact our eligibility for certain state benefits.

For example, the size of the state pension that you receive will be determined based on your National Insurance record ‒ you need to have at least 10 years of qualifying contributions in order to receive any state pension at all.

As a result, some people opt to make voluntary National Insurance contributions in addition to what they are required to pay, in order to secure the maximum possible payments. 

The Chancellor said that even those Class 2 contributions are being effectively scrapped, access to contributory benefits will be unchanged, while those who make voluntary contributions can do so at the same rate.

What difference will the National Insurance changes make?

These changes will provide a “welcome respite” to self-employed people, who tend to have lower average earnings than the employed, pointed out Sarah Coles, head of personal finance at Hargreaves Lansdown. 

She added: “However, this does nothing to protect those hard-working self-starters from the horrors of fiscal drag, which means tax bills will continue to rise for years to come.”

Shaun Moore, tax and financial planning expert at Quilter, pointed out that the changes to National Insurance contributions for the self-employed “sends a message” that they are no longer being viewed in the same way as employed workers.

He said: “Previously there has been a sense that the employed and self-employed should be treated the same. Under these new rules the self-employed get benefits for essentially taking more risk and as such get benefits like the state pension in return. This is therefore a marked change in policy.”

Further support for small businesses

Jeremy Hunt outlined other measures designed to boost small businesses in the Autumn Statement, besides the National Insurance contribution changes.

For example, the government is introducing additional measures to combat late payments, a significant issue for small firms. Any firm that is bidding for government contracts worth more than £5 million from April 2024 will have to demonstrate they pay their own invoices within an average of 55 days. This will then drop to 45 days in April 2025 and 30 days in the years following.

The government will also look to expand its Made Smart programme, which assists manufacturing SMEs in adopting digital technologies, as well as offering further support to smaller businesses who are looking to export their services to foreign markets.